Ownership, Control and Corporate Valuation of Brazilian Companies

Ricardo Leal (COPPEAD/UFRJ)

André Carvalhal (COPPEAD/UFRJ)

Sílvia Valadares (Min. Planejamento)

Jairo Procianoy (PPGA/UFRGS)

Introduction

Objectives: analyze the control structure of Brazilian companies and its effect on corporate valuation

Presentation structure: Data and methodology Direct shareholding composition Indirect shareholding composition Control & Value Conclusion

Hypotheses

Higher concentration of voting rights is associated with more expropriation

Higher expropriation is associated with lower corporate valuation

Therefore: Higher concentration of voting rights is associated with lower corporate valuation.

Data

Companies listed on the São Paulo Stock Exchange (Bovespa) that are not controlled by the Government

Year-end 1998 Sample: 225 firms, representing 70% of the

Bovespa market capitalization including government-controlled companies, and more than 90% of the Bovespa market capitalization excluding government-controlled companies.

Methodology

Two forms of shareholding composition: direct and indirect

We consider all shareholders with 5% or more of the voting capital

Information on the shareholding structure collected from the Infoinvest database

All 225 companies were divided into two groups: firms with a majority shareholder (more than 50% of the voting capital) and firms without a majority shareholder

Control Groups

For the companies with one majority shareholder: If there is an indirect control structure (pyramid):

– shareholder does not maintain control indirectly

– shareholder maintains control indirectly: by increasing its share of the voting capital by maintaining the same interest by decreasing its share in the voting capital

there is no indirect control structure

Control Groups

Is there a majority shareholder

Is there a pyramid?

No. Stop.

No. Stop.

Does shareholder keep control?

No. Stop.

Increase Same Decrease

Direct and Indirect Control

Firms with a controlling shareholder: largest has 74% of the voting capital

directly and 55% indirectly, on average 3 largest have 87% of the voting capital

directly and75% indirectly In firms without a controlling shareholder

the difference between direct and indirect control is minimal.

Direct Shareholder Composition

Large degree of concentration of voting capital Reasonable difference between the percentage of

voting and total capital held by large shareholders, voting rights are not the same as cash flow rights

The issuance of non-voting shares appears to be used by large shareholders to maintain control of the firm without having to hold 50% of the total capital

Direct Shareholder Composition

Indirect Control

If controlling shareholders make full utilization of the 2:1 non-voting to voting shares proportion to minimize their investment then, indirectly, we should expect to see these shareholders with a proportion of 17% or less of the voting capital

Computing Share of Capital

If a shareholder has 50% of a company that has 50% of another, then his or her indirect share of the total capital is 50% times 50% or 25%.

The same criteria is used to compute the share of the total capital owned by controlling shareholders

Indirect Shareholder Composition

Comments on Indirect Control

Total capital participation of major shareholders is much higher than 17%

This suggests that the utilization of pyramids as a mechanism to maintain control with less investment is not very common in Brazil

Therefore, there may exist private benefits of control, potentially by the expropriation of minority shareholders

Indirect Majority Shareholders

Indirect Control

Of the 121 companies where there is a majority direct shareholder and where pyramids are used, in 53 the major shareholder does not maintain control indirectly, while they do in 68

In the 68 firms where they maintain control indirectly, in 15 cases they concentrate their voting power, in 17 they keep it and in 36 they diversify

Measuring Value

Tobin’s Q and industry adjusted Tobin’s Q Price-to-book value (P-B) and industry adjusted

P-B Beta and industry adjusted beta to account for

risk We conduct an ANOVA and a differences in

means test in order to compare the expropriation measures among the six groups of companies

Value and Control

Value seems to be lower for firms where control is kept indirectly

Value seems to be lower for firms where control is not only kept but increases indirectly compared to the greater value of firms where the share of control is kept but decreases indirectly

Lower valuation for indirect concentration of the voting share is consistent with potential minority shareholder expropriation

Measuring Expropriation (1996)

Measuring Expropriation (1996)

Measuring Expropriation (1998)

Measuring Expropriation (1998)

Conclusion

Large degree of concentration of the voting capital in Brazilian companies in 1998

Reasonable difference between the percentage of voting and total capital held by large shareholders

The utilization of a pyramid structure does not appear to be an effort to avoid the one share-one vote rule in Brazilian companies.

Lower valuation for companies where private benefits of control are needed the most